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5 Effective Methods for Measuring Customer Loyalty

This week we are sharing this comprehensive post by Pascal van Opzeeland who originally published it on Userlike’s blog.

The loyalty of your customers can be measured. It’s difficult, though, because loyalty is an intention. And one that people aren’t always honest about.

While they’re closely related, the measuring of customer loyalty works differently than that of customer satisfaction or service quality.

Defining Customer Loyalty

The dictionary defines “loyalty” as a “strong feeling of support or allegiance”. Customer loyalty basically represents your customer’s intention to keep buying from you.

It manifests itself in a variety of ways. A loyal customer…

Refers you to her friends and contacts.

Continues buying from you as long as the need is there.

Is not actively looking for other suppliers.

Is not open to sales pitches from competitors.

Is open to other products and services that you offer.

Tolerates emerging issues and gives you time and trust to fix them.

Gives feedback about how you could improve.

The loyalty of a customer is closely related to her reasons for buying from you. There’s no such thing as “unconditional loyalty”.

If she’s a customer because of a good relation with one of your service reps, she’ll stay with you as long as that person is an employee.

If she’s a customer because you’re the cheapest provider, she’ll stay with you until a cheaper alternative comes by.

If she’s a customer because of an emotional connection with your corporate philosophy and greater purpose, she’ll likely stay with you as long as you stay true to that.

Anyone can sell products by dropping their prices, but it does not breed loyalty.

Simon Sinek

Of all the reasons to be loyal, the one based on you being the cheapest option is the weakest. When price is the only reason, the customer relationship is purely rational, and will be broken as soon as a cheaper competitor comes by. A loyal relationship, on the other hand, is based on emotion, and defies rationality.

Champion of Customer Loyalty

When you search for “customer loyalty”, you soon run into case studies about Apple Inc. Indeed, this company nailed it.

Apple, a champion of customer loyalty.

When Apple launches a fancy new device, its most fervent fans set up camp in front of the Apple store a few days in advance. If Samsung would bring out a phone that beats the iPhone in both functionality and price, people would still buy buy from Apple.

Methods for Measuring Customer Loyalty

Measurement is the first step in customer loyalty management. Through measurement we can compare, aim, and improve. Here are the 5 most effective methods.

1. Net Promoter Score (NPS)

This metric indicates the likeliness of your customer referring you to her friends. She answers this simple question with a value between 1 – 10.

This is a powerful metric. Firstly because it’s simple, but also because of the fact that when you recommend a product, you put your own credibility on the line. And you only do that for companies you support 100%.

NPS divides your customers into three categories:

Detractors. Customers answering with a score of 6 or lower are segmented as “Detractors”. They won’t recommend you to anyone, will probably not buy from you again, and might even hurt you through negative word-of-mouth.

Passives. Those with a 7 or 8 are segmented as “Passives”. They are quite satisfied, but not ecstatic enough to recommend you. They won’t hurt you, they aren’t looking for alternatives, and they’ll likely stick around as long as they don’t run into a supplier with a better value proposition.

Promoters. Those with a 9 or 10 fall into the “Promoters” segment. They are your groupies, your equivalent of the people camping in front of the Apple store. They’re likely to recommend you and buy from you again.

Most NPS tools work by importing a list of your customer contact data and sending the questionnaire per email. Trustfuel NPS (free), and Promoter.io (paid) are two popular tools. I personally like in-app tools like Wootric (freemium). Instead of targeting your customer’s inbox, it politely asks for feedback while she’s on your website or app. Through in-app questionnaires you can ask for feedback with minimal disruption.

Wootric’s survey, which allows the measuring of customer satisfaction with minimal disruption to customers

Your Promoter – Detractor ratio doesn’t depend on your service and product quality, only. Some customers simply fit your company better than others. Tying your NPS scores to customer information, like demographics and industry, can also help you identify your ideal customer type.

2. Repurchase Ratio

This measures the ratio of repeat purchasers over one-time purchasers. A purchase is at the core of a commercial relationship, which makes this metric a valid representation of customer loyalty.

This metric can be easily distorted, however. If it takes a big effort to switch between providers, for example, you could have a large portion of repurchasers who would nevertheless switch if this effort would be mitigated.

At Userlike, for example, we had been renewing our contract with a helpdesk software for a long time. We didn’t think of switching, because all our customer data was locked in the tool. When Help Scout showed up, however, with the option to easily transfer all this data to their tool, we didn’t hesitate.

Help Scout lowers the barrier for switching between suppliers.

The way to calculate this repurchase ratio differs per business model. If you have a subscription based model, you simply divide the number of customers that extend after their first contract period by the ones that cancel after their first contact period.

It’s a bit trickier for transaction based business models, because the intervals between purchases aren’t fixed. To know your number of repeat buyers, you need to first calculate the average time between the first and second buys of repeat customers, as well as its standard variation. By adding two times the standard variation to the average time, you will have captured 95% of your repeat customers. Divide this by the number of non-repeat buyers, and you have your estimated repurchase ratio. Here is a tool to calculate your standard deviation.

Another way would be to measure the repurchase intention, which we cover in method 4.

3. Upselling Ratio

This tracks the ratio of customers who’ve bought more than one type of product divided by the customers who’ve bought only one. This sounds similar to the Repurchase Ratio, but it’s different because it concerns another product.

Buying new products is a clear indication of customer loyalty. The trust you gained through your customer’s previous experiences has reflected on your other product offerings.

Apple afficionados trust whatever tool the tech giant brings out.

The more different the added product is from the first product, the more significant an indication for customer loyalty it is. Buying a kilo of pears at the grocery shop you know to have great apples, for example, isn’t too big of a leap. Buying a smartphone because you’re happy with your laptop, however, does constitute a big leap.

You calculate the upselling ration by dividing your number of customers with multiple products by the number of customers with a single product.

Another way would be to measure the upselling intention, which we cover next.

4. Customer Loyalty Index (CLI)

This is a standardized tool to track customer loyalty over time, and it incorporates the values of NPS, repurchasing, and upselling.

It calculates all three values with an NPS-like questionnaire on a 6-point scale. 1 stands for “Definitely Yes”, 6 stands for “Definitely No”.

How likely are you to recommend us to your friends or contacts?

How likely are you to buy from us again in the future?

How likely are you to try out other of our products/services?

Your total CLI is the average score of the 3 responses.

Answer scores:1 = 100
2 = 80
3 = 60
4 = 40
5 = 20
6 = 0

The downside of this approach is that you ask directly for the customer’s intention, which is less reliable than measuring actual behavior. The advantage is that this score incorporates all of the loyalty values. Also, by consistently sending this questionnaire over time, it allows you to systematically track changes.

5. Customer Engagement Numbers

According to Curtis N. Bingham, customer engagement is the most effective predictor of customer loyalty. He argues that compared to NPS and CLI, customer engagement metrics are easier to measure, to influence, and that they’re more strongly correlated with revenue and profits.

Customer engagement is a strong predictor of loyalty

Bingham explains that customer loyalty results out of positive interactions and experiences with your brand. These nurture emotional attachments that shield your customers from competitor influence.

Through this, says Bingham, customer engagement:

Stimulates repurchasing

Lowers price sensitivity

Promotes referrals

Customer engagement is indeed an interesting area, especially for online businesses – for whom its metrics are relatively easy to track. For offline products and services, though, the tracking is much harder.

Activity Time. This is the average time your customers spend with your service; per day, week, month, or year – whichever is most relevant for your offering.

Visit Frequency. This tracks how often a user returns to your service. Keep an eye on patterns in returning user visits. If you have a brain training app, probably your users should return a few times per week. While for website analytics tools, for example, a few times per month should be fine.

Core User Actions. Track whether user gets to experience the main features. For us: adjust the Chat Widget coloring, set up operator picture, set up chat macros, etc.

By keeping track of these metrics over time, you see whether the fit with your user base is improving.

Customer loyalty is one of the main predictors of success. No company can stay ahead of the herd all of the time. The loyalty of your customers determines your breathing space for catching up.

Start building customer loyalty today.
Sign up for free in-app NPS with Wootric.